U.S.-China Macroeconomic Policy Coordination: A MAP Without Daggers
By David Loevinger & Spencer Rodriguez
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“When the map is unrolled, the dagger is revealed [圖窮匕現],” Chinese Proverb
Unlike in the Chinese proverb, where a map hides danger, we think the G20 MAP (Mutual Assessment Process), which G20 leaders created at the 2009 Pittsburgh Summit “[to ensure] that collective policy actions benefits all,” still represents an opportunity.1 The benefits of collective actions were highlighted when the United States, China, and other major economies took actions to stabilize global financial markets in early 2016—following the first Federal Reserve rate hike since the Lehman shock. However, cooperation on macroeconomic policies remains more of an exception than a rule, with policymakers taking concerted actions only when they have an economic dagger hanging over their head.
Economic research has long cited the mutual benefits of greater macroeconomic cooperation.2 In an increasingly interconnected global economy, one country’s macroeconomic policies impact other economies, for better or worse. Because of these spillovers, policymakers who only take into account the impact of their policies on their own economies will lead to suboptimal global economic outcomes. Moreover, given the rapid transmission of investor sentiment across financial markets, relying on actions by individual countries can be insufficient to forestall panics and their accompanying contagion.
Collective actions helped stem the Renminbi (RMB) market panic of 2016
Following what was perceived as a highly market-unfriendly response to stock market volatility in the summer of 2015, China undertook a relatively modest adjustment of the Chinese yuan exchange rate. This, combined with a lack of market communications, fears of a material slowdown of China’s economy, expectations that the U.S. Fed would hike policy rates aggressively, and an ongoing anticorruption campaign, led to large capital outflows from China and losses of foreign exchange reserves (with the People’s Bank of China selling over $300 billion between August 2015 and January 2016). China appeared to be on the precipice of a self-reinforcing financial panic, with capital outflows leading to a further depletion of foreign exchange reserves, undermining confidence in China’s ability to maintain currency market stability, leading to further outflows.
Moreover, given China’s linkages to other economies, other currencies were hit adversely, particularly in commodity-based economies. In the United States, a stronger dollar stemming from a global flight to safety threatened to tighten U.S. monetary conditions and renew deflationary pressure. To stem the market panic, absent policy responses from other major economies, China would no doubt have had to spend significantly more foreign exchange reserves and impose more draconian capital controls. Fortunately, China may have catalyzed greater cooperation by announcing that it was shifting from a peg managed against the dollar to a peg managed against a basket of currencies. This signaled to other central banks that China would no longer be as willing to follow the dollar, and thus import tighter monetary conditions in response to unilateral efforts to ease monetary conditions (in the case of Japan and the European Union) or tighten monetary conditions (in the case of the United States).
In the run-up to, during, and after the February 2016 G20 Finance Ministers and Central Bank Governors’ meeting in Shanghai there was consensus among major G20 members for collective statements and actions to stem market volatility, though we doubt there was ever an explicit agreement. Perhaps the most critical action was People’s Bank of China (PBOC) Governor Zhou Xiaochuan’s interview in Caixin, breaking months of silence, in which he stated that “keeping the stability of the renminbi exchange rate to a basket of currencies is the major goal” and that there is “no basis for persistent RMB depreciation.”3 In addition, in the Shanghai Meeting’s February Communiqué, the G20 finance ministers agreed to “consult closely on exchange markets”—a phrase that had only previously appeared in G7 statements.4 Also important was the March statement by the U.S. Federal Reserve that “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” citing “global economic and financial developments, [which] continue to pose risks.”5 Chairwoman Janet Yellen stressed in her March 2016 post-Federal Open Market Committee (FOMC) press conference that the “decision partly reflects the implications for the U.S. economy of the global economic and financial developments.”6 The language boosted perceptions that the Fed would be more sensitive to the impact of its actions on international markets, lowering market expectations for the path of Fed rate hikes, weakening the dollar, and reducing pressure on the RMB.
The implicit “Shanghai Accord” demonstrates how mutually beneficial policy actions can be induced when there are shared objectives and the cost of inaction to key actors is high. Absent these conditions, macroeconomic policy coordination has and will likely continue to be more of the exception than the rule. Some institutions, such as the U.S. Federal Reserve, are legally mandated to target domestic economic outcomes and have to justify taking into account the international impacts of their policies indirectly through the effects of these impacts on their U.S.-centered objectives. In addition, the greater number of domestic actors involved in policy coordination, the more difficult it becomes to include coordination with foreign actors as a priority. For this reason, the prospects for policy coordination are greater for monetary than fiscal policy. However, the PBOC’s lack of legal and operational independence and the collective nature of major monetary decisions hamper China’s ability to coordinate monetary policies internationally.
Expanding cooperation beyond government
Macroeconomic policy coordination should go beyond just government officials and include other economic agents so their actions are less at cross purposes. Research has highlighted the benefits of greater central bank transparency.7 China’s poor market communications in 2015 and the statements surrounding the Shanghai G20 meeting highlight how communications and forward guidance can impact the effectiveness of macroeconomic policies. Both the Fed and the PBOC have made considerable progress toward enhancing their transparency and improving their public communications, but each has room for improvement. The PBOC remains among the least transparent major central banks owing to the less transparent nature of Chinese policymaking, the more collective nature of major monetary policy decisions, and the lack of senior officials with capital markets, and particularly international capital markets, experience.8 While there is no shortage of talented Chinese nationals working in international capital markets, the government’s anticorruption campaign has made it more difficult for them to take senior financial policy positions. We encourage the Chinese authorities to bring into senior financial positions more officials with capital markets and market communications experience.
The Fed, on the other hand, is considered among the more transparent major central banks. However, while the PBOC continues to expand translations of major statements and reports, the Fed only publishes its statements in English. Given 1) the rising importance that the Fed places on its forward guidance and the attention it puts into every word of its FOMC statements, and 2) that English is not the primary language for most global investors, it is odd that the Fed provides so little guidance to the foreign media and analysts that translate its statements. We encourage the Fed to translate its major policy statements concurrently with the release of English versions.
Addressing external imbalances—challenges ahead
One of the focuses of the G20’s MAP is the reduction of global imbalances. Concerted actions by the United States and China, coordinated or otherwise, have led to important reductions in their external imbalances. In China the current account surplus has fallen dramatically as a percent of GDP, mainly through a sharp decline in the national savings rate. This resulted from policies to promote services (including tax reforms) and by implication consumption (as services are largely consumed), a boom in infrastructure and property investment, a material appreciation of the real effective exchange rate, a modest expansion of the social safety net, and an aging population. A similar trend can be seen in the United States, where the current account deficit declined as a percent of GDP, driven by a boost in energy production and an increase in national savings due to a decrease in the federal budget deficit.
The outlook for further progress in reducing external imbalances, however, is limited. In China, while an aging population will continue to put downward pressure on the savings rate, the current account surplus is likely at best to be stable (relative to China’s GDP), which implies a rising global current account deficit with China (relative to non-China global GDP). Due to concerns over financial stability and to rising corporate debt and excess capacity, Chinese regulators are belatedly and correctly pressing to slow the growth of credit and investment. Also, at a time when China is tightening financial conditions by raising interest rates and slowing credit growth, its appetite for a further tightening of monetary conditions through an appreciation of its real effective exchange rate appears limited.
In the United States, the outlook is even worse. Despite an expressed preference for smaller bilateral imbalances with major trading partners, the current account deficit is likely to increase as rising U.S. policy rates and a shrinking of the Fed’s balance sheet put upward pressure on the dollar and an aging population and rising entitlement and interest expenditures put downward pressure on private and public savings. While the outlook for U.S. fiscal policy remains uncertain, it appears highly likely that any near-term policy changes will further increase the current account deficit through a decline in public sector savings as the adverse impact on revenues from tax cuts is likely to exceed spending cuts. While a shift in income from lower- to higher-income households and lower taxes on corporate profits are likely to increase private savings, this is unlikely to be offset by the decline in public savings.
Macroeconomic coordination among countries can boost global growth and help forestall crisis, but is only likely if there are shared objectives and the cost of inaction is high. To promote better coordination of actions both among government and private actors, we think both the United States and China can improve their market communication, with the Fed translating more statements, and the PBOC governor and other senior finance officials making more regular public statements and press conferences. Given China’s rising impact on global markets, it is also vital that China bring into senior policy positions more officials with international capital markets experience. Finally, we urge the new U.S. government to drop its focus on reducing bilateral imbalances, which is likely to be ineffective at best (as bilateral imbalances simply shift to other economies) and highly distortive at worst (through a rise in trade barriers). Washington also needs to recognize that Chinese efforts to mitigate financial risks may lead to a larger Chinese current account surplus in the near term.
 International Monetary Fund, The G20 Mutual Assessment Process (MAP),, April 20, 2017, https://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/48/G20-Mutual-Assessment-Process-MAP.
 Jeffry A. Frieden, “Macroeconomic Rebalancing in China and the G20,” China & World Economy, Vol. 24, No. 4 (2016): 15–33, http://scholar.harvard.edu/files/jfrieden/files/frieden2016_cwe_published.pdf.
 ,Xiaochuan Zhou, “Transcript of Governor Zhou Xiaochuan’s Exclusive Interview with Caixin Weekly,” Interview by Caixin Weekly, The People’s Bank of China, February 14, 2016, http://web.archive.org/web/20160218065526/http:/www.pbc.gov.cn/english/130721/3017134/index.html.http://web.archive.org/web/20160218065526/http:/www.pbc.gov.cn/english/130721/3017134/index.html.
 Ministry of Finance of the People's Republic of China, “G20 Finance Ministers and Central Bank Governors Meeting,” February 27, 2016, http://www.g20.utoronto.ca/2016/160227-finance-en.html.
 Federal Reserve, “Federal Reserve issues FOMC statement,” March 16, 2016, https://www.federalreserve.gov/newsevents/pressreleases/monetary20160316a.htm.
 Federal Reserve, “Transcript of Chair Yellen’s Press Conference,” March 16, 2016, https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20160316.pdf.
 N. Nergiz Dincer and Barry Eichengreen, “Central Bank Transparency and Independence: Updates and New Measures,” International Journal of Central Banking, Vol. 10, No. 1 (2014): 189–253, http://www.ijcb.org/journal/ijcb14q1a6.pdf.